From an economic point of view, the bad loans have been considered as a key factor in banking crises. In recent years, the European debt crisis and the following recession, have increased loans defaults, specifically in Spain and Italy, causing significant losses for banks. In this analysis the main macroeconomic determinants of Non-Performing Loans (NPL) will be studied over the period from January 2004 to March 2012. Separate analyses will be conducted for Spain and Italy considering that these countries have one of the largest amounts of bad loans in Europe, as well as deteriorated macroeconomic indicators during recent years. The paper has been organised in the following way: in the chapter entitled ‘literature review’, the most important facts about the macroeconomic variables will be analysed focusing on NPL for Italy and Spain. I will move on to describe the main literature on determinants of Non-Performing Loans. Econometric literature will also be discussed, with special emphasis on time series procedures for macroeconomic variables. This section is important in order to determine the variables and to be aware of atypical data in the time series. Previous research in this field using the same or similar methodology additionally corroborates its efficiency and aptness for use in this paper. Secondly, the variables used in this analysis will be explained bearing in mind the literature before mentioned. The econometric methodology and procedures used to obtain econometric results will then be presented in detail. Lastly, the results will be carefully analysed for Spain and Italy respectively, and conclusions regarding the determinants of Non-Performing Loans in these two countries will be drawn.